What Is Financial Risk And Its Types

All the risks that can occur in Finance refer to financial risks. For every business person,
the fear of such risk is always at peak. Hence, Financial Risk Manager is gaining much popularity in this regard. It
can provide tactics to mitigate financial risks. But, before mitigation, we have to know what the types of
financial risk are. So let’s start and have a look at some risks.

Main Categories of Risks

Risks are unexpected outcomes which can be categorized into three
main categories:

Business Risks

Non-Business Risks

Financial Risks

Business Risks

Business Risks are those risks that are taken by corporates to enhance their sales. For instance: A company is investing higher costs just hoping to
get back high profit. This is indeed a risk as all investment can drop too.

Non-Business Risks

Some risks are non- business. These are not under the control of
the company. However, external factors
enhance such risks.

Financial Risks

Financial risks refer to risks and decline in finance. This may
arise due to a number of factors such as:

Fluctuation in the stock market

The downfall of currency

Interest charges

Subdivisions of Financial Risk

Now, let us take a deep look inside financial risks. Financial risk
is further subdivided into:

Market Risk

The risk arising due to fluctuation in prices is called as market risk. This fluctuation can be in financial instruments. It is further broken down into:

Directional risk (caused due to the fluctuating stock market).

Non-Directional risk (such as
volatility risks).

Credit Risk

It happens when a borrower fails to make payment. It also has
further two categories:

Sovereign risks

Settlement risks

Complex foreign exchange policies give birth to sovereign risks.
While settlement risk arises only when one company pays off and the second company fails to pay.

Liquidity Risk

When certain commodities can’t be traded efficiently to market and it does not even affect the market price. Such risk is called liquidity risk. It is further divided into: